Tax Options for Financing Health Care Reform Page: 10 of 18
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Tax Options for Financing Health Care Reform
community service organizations. In 1986, these firms' tax exemptions were removed given the
view that their activities were highly similar to commercial insurance. The special benefits were
provided as a substitute. The Blues continue to provide some specialized and community rates
provisions, which presumably are aided by the tax benefit, but the tax provision also benefits
shareholders and other groups.
Health Savings Accounts
A health savings account (HSA) is allowed for individuals with a high deductible employer health
plan, and it allows tax deductible contributions to an HSA as well as exclusions (from both
income and payroll tax) for contributions from employers.'a Investment earnings are not taxable,
and income is not taxable when paid out if spent on medical costs. Distributions for other
purposes are includable in income and subject to a 10% additional tax. The contributions have a
dollar cap. Foregone taxes due to HSAs cost about $0.5 billion per year according to JCT
estimates, but the cost is expected to grow somewhat. HSAs are advantageous because they allow
individuals to purchase insurance against catastrophic costs but not for more routine costs,
thereby reducing the incentive to spend too much on health care because insurance pays for much
of the cost. At the same time, they exacerbate adverse selection, because they attract more healthy
individuals out of other insurance pools.
The Finance Committee options paper discusses limiting the amount that can be contributed by
the individual to the individual's deductible under a high deductible health plan and an increase in
the penalty for non-medical uses. Distributions from an HSA would only be excludible from
income as spending on medical costs if substantiated by the employer or an independent third
paper. The proposals would also include HSA contributions under a general employer cap.
Flexible Spending Plans/Health Reimbursement Arrangements
Flexible spending accounts (FSAs) allow reductions in taxable income to fund certain program
benefits, which may be chosen under a cafeteria plan or otherwise provided by the employer. A
plan provided under a cafeteria approach allows employees to opt for a reduction in salary to
provide contributions. Amounts can also be specified under health reimbursement arrangements.
Options for raising revenue (in addition to counting these plans as part of benefits for purposes of
imposing a general cap) include limits to the amounts contributed or eliminating these
contributions. An important reason for concerns about these plans is the "use it or lose it" nature
of the plan, with amounts remaining in the account forfeited at the end of the year. For health
FSAs , there are concerns that this rule induces excessive spending for individuals with amounts
unspent towards the end of the year.19
Limit Qualified Medical Expense Definition
The cost of over-the-counter medication does not count for purposes of the itemized deduction for
expenditures in excess of the 7.5% floor, but is covered under health savings accounts, health
flexible spending accounts, and health reimbursement accounts. This policy option proposes to
18 See CRS Report RL33275, The LIHEAP Formula: Legislative History and Current Law, by Libby Perl.
19 See CRS Report RL32656, Health Care Flexible Spending Accounts, by Bob Lyke and Janemarie Mulvey.
Congressional Research Service
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Tax Options for Financing Health Care Reform, report, June 19, 2009; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc809116/m1/10/: accessed February 16, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.